Value stocks are those trading at a discount versus their intrinsic or book value. Many investors build their strategy around these stocks, including the legendary Warren Buffett.
Value investors look to buy companies trading below their intrinsic value and hold them, sometimes for a very long time, until they’ve reached their potential. Over the last century, a value investing strategy has frequently outperformed all major indexes.
Why now?
Well, it’s always easier to find value stocks in retreating markets. And, as we saw, March wasn’t a great month for several sectors, primarily financial stocks.
March’s correction was triggered by a banking crisis in the US, specifically when tech financier Silicon Valley Bank (SVB) was forced to sell bonds at a loss when depositors withdrew their cash.
These bonds had lost value because bond prices and bond yields are inversely related — as we know central banks have been pushing rates upwards.
But SVB was unique in the concentrated nature of its bond holdings and the lack of diversity in its deposit base. However, the events raised concerns that other banks and financial institutions were sitting on billions of unreleased bond losses.
A few weeks later, we now know that these fears were largely misplaced. Liquidity is strong in this post-GFC world and most banks will hold bonds to maturity — that’s why these remain unreleased bond losses.
But the downward pressure on stocks has created opportunities. Especially as many UK-based financial institutions were trading at discounts anyway.
Buffett is among several value investors to hail the opportunities created by a correction. “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.” He adds that “net buyers” of stocks benefit when the stock market goes down.
Where to put my money
I’m focusing on some of the stocks hardest hit by the March selloff. I liked financial stocks before the correction, and now several are trading 20% cheaper than a month ago.
Among the biggest losers in Standard Chartered. The bank is down 22% over one month — up 20% over a year. It’s one of the more exciting UK-listed banks as it naturally focuses on the fast-growing markets of Asia and the Middle East.
Currently, Standard Chartered trades with a price-to-earnings ratio of 7.5, making it substantially cheaper than US peers, but among the more expensive UK banks. There are naturally concerns that interest rates are too high right now, and this will translate into higher impairment costs. But medium-term forecast see rates falling to more attractive levels — 2-3%. As the stock dips, I bought in.
Legal & General is another financial stock I’ve topped up after seeing downward pressure. It’s down 10% over a month — off 13% over a year — but it doesn’t seem warranted. Its solvency II coverage ratio rose to 236% from 187% during 2022, and business growth is positive — it’s arguably the most exposed to the positive trends in bulk purchase annuity.
